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Research Summary

Self-Employment Savvy: The Relationship between Financial Literacy and Working Independently

Annabel Stattelman ScanlanMarch 12, 2024
Source: Journal of Business Research Title: Financial literacy and self-employment—The moderating effect of gender and race Author(s): Elisabeth M. Struckell, Pankaj C. Patel, Divesh Ojha, Pejvak Oghazi Original Publication Date: 2022 Read Full Research Article

The growth of the gig economy, expanded technology and internet access, and the promise of flexibility are inspiring new interest in self-employment from Gen Z, parents, people with disabilities, and Baby Boomers. Though the nature of independent work makes it difficult to measure, more that 15 million US workers identify as self-employed according to data from the US Census Bureau. Independent contractors, small business owners, consultants, and freelancers are all included in this employment classification, which spans industries from graphic design to construction.

Financial literacy, defined as how well one can understand and use financial knowledge, is an important skill for self-employed workers. Without an employer, individuals are required to prepare budgets, navigate the tax system, and make decisions about health care and insurance on their own. The viability of independent employment is complicated by low rates of financial literacy in the United States: according to the Financial Industry Regulatory Authority, roughly two-thirds of US adults do not have a sufficient understanding of financial risk, mortgages, or interest.

While research finds a connection between financial literacy and rates of self-employment, studies have not yet explored whether this relationship holds true for women and non-White US workers. To fill this gap, researchers Elisabeth Struckell at the University of North Carolina at Wilmington, Pankaj Patel at Villanova University, Divesh Ojha at the University of North Texas, and Pejvak Oghazi at Sodertorn University in Sweden use data from the 2015 and 2018 National Financial Capability Studies to investigate whether race and gender impact the association between financial knowledge and nontraditional employment.

The authors compare survey respondents using their scores on a five-question, multiple-choice financial skills quiz after controlling for financial hardships, self-rated financial ability, and willingness to take financial risks. The survey also collected demographic information, including age group, education, marital status, income, credit rating, health insurance coverage, gender, and race.

Key findings
  • As workers’ financial skills increase, so does the probability that they are self-employed, regardless of their income, age, education, and marital status. There are two key reasons why this may be the case. Self-employment requires individuals to expand their skillsets to include the ability to manage money, and individuals who are more financially literate might also self-select into independent employment.
  • The relationship between financial literacy and self-employment is similar for White and non-White workers. The rates of independent employment for the two groups increase at similar rates as financial literacy rates increase, despite differences in financial literacy and the types of self-employment between non-White and White workers.
    • This finding suggests that developing financial skills through experience is a viable alternative to formal training. Non-White workers might be pushed into self-employment regardless of their financial skills due to a lack of traditional job opportunities, resulting in “on-the-job” financial education.
  • Women, Hispanic workers, and Black workers are less likely to be self-employed than White men. While women make up half of the traditional workforce, only 40 percent of self-employed workers are women. Non-White workers are 29 percent of the total self-employed workers in the United States, compared to 37 percent of the total employed workforce.
    • These demographic groups are also less likely to be financially literate. According to a 2019 study, the gap between rates of financial literacy for White and non-White workers is as large as 15 percent. Similarly, women report lower financial literacy when tested compared to their male peers.
  • Self-employed women have higher rates of financial literacy than traditional employees and self-employed men. Women may feel the need to be more financially skilled before starting self-employment, just as women tend to be more selective in the job search process and restrict their applications to jobs for which they feel most qualified.
  • The study’s findings on the relationship between financial skills and self-employment hold true despite variation in wealth and risk-taking behavior. These factors may influence an individual’s decision to seek self-employment or financial education: an individual with significant assets might work to gain financial skills, and some people might feel more confident working independently than others. As the survey contains questions concerning current financial position, willingness to take risks on finances, and other aspects of financial strain, the authors can ensure that these variables do not influence their results.
Policy and practice implications

WorkRise has identified the following implications for policy and/or practice:

  • State policymakers should expand access to financial literacy education by passing legislation making it a high school graduation requirement. According to a recent report, only 7 states require that students receive personal finance instruction for at least one semester before graduation. Though 16 states are projected to implement similar policies by 2028, others have no plans to change their educational guidelines.
  • High school educators and instructors who focus on specific occupations with high rates of self-employment should ensure instruction covers topics relevant to self-employment. An ever-growing proportion of students will need this knowledge when they begin working independently in the future or start their own businesses. Self-employed cosmetology professionals and nursing consultants, for example, could both benefit from information about budgeting, insurance, and debt.
  • Advocates for women in the workforce should seek to expand financial education programs. Given this study’s findings, prioritizing financial literacy in women has the potential to significantly close the self-employment gap. Nonprofits such as Savvy Ladies, Invest in Girls, and the Foundation for Women’s Financial Education are already working to increase financial knowledge and economic mobility for many women.
  • Organizations looking to support Black and Hispanic entrepreneurs and small business development programs should direct resources toward financial literacy. The Acción Opportunity Fund, for example, has a resource library for Hispanic-owned small businesses with pages on tax considerations, growth plans, and accounting. Spelman College, Morehouse College, and the Black Economic Alliance Foundation created the Center for Black Entrepreneurship, which offers curriculum on finance, creating businesses, and finding investors.
  • Federal representatives should increase congressional appropriations directed toward the US Department of the Treasury’s Community Development Financial Institutions Fund. This fund provides monetary support to community financial institutions such as credit unions in underserved communities. Many of these organizations, including the New Horizon Federal Credit Union and the Lewis Clark Credit Union, provide free counseling in addition to financial services.

As self-employment continues to grow across the United States, policymakers, educators, and advocates must take action to provide Hispanic workers, Black workers, and women overall with the money management skills they need to be successful. Though financial literacy rates in the Unites States remain low, this study demonstrates that investment in financial education can encourage small business development, entrepreneurship, and other types of independent employment regardless of race, ethnicity, and gender.

(The Good Brigade/Getty)

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